Student loans only inflate the U.S. debt

Published 3:02 pm, Friday, August 22, 2014

Perhaps we should not be surprised that the Obama administration's solution to a problem of high debts is to incur even more debt. This was the thinking with the economy as a whole, which has languished for more than five years since the official end of the 2007-09 recession, and now the administration is doubling down on this strategy to address student loan debt.

The U.S. Department of Education has announced that it will ease the government's direct student loan rules to allow more students to obtain loans. The revised rules would restrict the time period for reviewing one's credit from the last five years to the last two years, except for major credit problems like bankruptcy and foreclosure, and would allow people to more easily qualify for loans if they have up to $2,085 in debt in collections or written off by creditors, which would generally disqualify someone under existing rules.

The Education Department estimates that the new rules would allow an additional 370,000 borrowers to qualify for loans. The rules are expected to be finalized by November and take effect by the fall of 2015.

Student loan debt is certainly a serious problem. The Federal Reserve Bank of New York reports that student loan debt tops $1.1 trillion and is the worst credit risk of any major debt category. About 11 percent of student loans are more than 90 days delinquent.

Subsidizing higher education by offering below-market interest rate loans or by extending credit to those whom private lenders — who must put their own money at risk — deem to be excessive risks, attracts more students, but it also drives up the cost of education — at taxpayers' expense.

The goal of helping more kids go to college may be well-intended, just as was encouraging more people to own their own homes. But, as with the housing market, promoting more debt for students who are poor credit risks and will not be able to pay off that debt only inflates a debt bubble that will prove to be a yoke around the necks of students and taxpayers alike.